ANNUAL REPORT SHEPHERD NEAME LIMITED

Transcription

1 SHEPHERD NEAME LIMITED ANNUAL REPORT 2018

2 SHEPHERD NEAME AN INDEPENDENT FAMILY BUSINESS BRITAIN S OLDEST BREWER OUR VISION To be a Great British Brewer and run the best pubs. OUR MISSION To give our customers a great and memorable experience to make for a better day! The Spitfire, Kings Hill

3 Strategic Report Governance Financial Statements Other Information CONTENTS STRATEGIC REPORT 2 Financial Highlights 3 Our Strategy 4 At a Glance 6 Chairman s Statement 10 Chief Executive s Review 18 Other Financial Commentary 22 Principal Risks and Uncertainties 24 Commitment to the Community GOVERNANCE 26 Board of Directors 28 Corporate Governance 30 Remuneration Report 35 Report of the Directors 36 Directors Responsibilities Statement FINANCIAL STATEMENTS 37 Independent Auditor s Report 40 Consolidated Profit and Loss Account 40 Consolidated Statement of Comprehensive Income 41 Consolidated and Parent Company Balance Sheet 42 Consolidated Statement of Changes in Equity 43 Consolidated Cash Flow Statement 44 Notes to the Accounts OTHER INFORMATION 65 Financial Calendar 65 Company Advisors 66 Notice of Meeting 68 Five Year Financial Summary 1

4 FINANCIAL HIGHLIGHTS Turnover M M Underlying operating profit M M Statutory profit before tax M M Underlying basic earnings per share P P Dividend per share P P Net assets per share was a 53 week year to 30 June was a 52 week year to 24 June Profit before net finance costs, any profit or loss on the disposal of properties, investment property fair value movements and operating charges which are either material or infrequent in nature and do not relate to the underlying performance (see note 7). 4 Underlying profit less attributable taxation divided by the weighted average number of ordinary shares in issue during the period. The number of shares in issue excludes those held by the Company and not allocated to employees under the Share Incentive Plan, which are treated as cancelled. 5 Net assets at the balance sheet date divided by the number of shares in issue being 14,857,500 50p shares. 2 Shepherd Neame annual report and accounts 2018

5 OUR STRATEGY We aim to drive shareholder returns from four key strategic objectives PROGRESS TO DRIVE FOOTFALL TO OUR PUBS TO DRIVE FOOTFALL TO OUR PUBS PAGE 8 TO ATTRACT, RETAIN AND DEVELOP THE BEST PEOPLE PAGE 16 Opened a new outlet, Pier Five Bar and Kitchen in Chatham Maritime Acquired two London pubs, the Samuel Pepys and the Savoy Tap Disposed of eight pubs that no longer fit our long-term strategy Three transformational investments in the managed estate at the Market House, Maidstone, the Spitfire, Kings Hill, West Malling and the Boathouse, Yalding TO DEVELOP OUR OFFER TO ENHANCE THE CUSTOMER EXPERIENCE PAGE 12 TO CREATE DEMAND AND BUILD AWARENESS FOR OUR BRANDS PAGE 20 Performance against our Key Performance Indicators (KPIs) 1 Like-for-like ( LFL ) sales in managed pubs are up +1.3% (2017: +8.1%) LFL EBITDAR 2 in our tenanted pubs 3 was up +2.1% (2017: +1.6%) Average EBITDAR per managed pub down -1.8% (2017: +1.8%) Average EBITDAR per tenanted pub up +5.8% (2017: +5.6%) Strategic Report Governance Financial Statements Other Information TO DEVELOP OUR OFFER TO ENHANCE THE CUSTOMER EXPERIENCE Invested significantly to upgrade our pubs bars Introduced craft beers and ciders, and premium international beers to sit alongside our core range Invested in technology to improve speed of service and pre-booking for our customers Expanded our range of healthy, lighter, vegan and low calorie options TO ATTRACT, RETAIN AND DEVELOP THE BEST PEOPLE Launched a programme for all employees called the Sheps Way, that sets out how we recruit, train and develop our people and articulates the Company s behaviours and values Introduced a new bonus and incentive structure in our managed pubs, aligned to deliver great service to our customers TO CREATE DEMAND AND BUILD AWARENESS FOR OUR BRANDS New brand identity signage rolled out in more than a quarter of the total pub estate Continued development of our portfolio with the launch of Five Grain Premium Lager and Bear Island East Coast Pale Ale Consolidated our customer databases to improve communication and enhance customer engagement Performance against our KPIs 1 Drinks LFL sales up +2.3% (2017: +8.0%) Food LFL sales down -1.3% (2017: +7.7%) Accommodation LFL sales up +2.9% (2017: +10.1%) Occupancy is 79% (2017: 79%) RevPAR 4 is 67 (2017: 66) We continue to provide excellent support for our tenanted licensees through menu and drinks list development as well as comprehensive training Performance against our KPIs 1 Total own beer volumes were down -10.6% (2017: +3.9%) following exit from Asahi contract Shepherd Neame own brand beer and cider volume was down -0.9% (2017: +1.4%) 1 All KPI information is on a 52 vs 52 week basis 2 Like-for-like earnings before interest, tax, depreciation, amortisation and rent payable 3 Comprises pubs operated by third parties under tenancy or tied lease agreements 4 Revenue Per Available Room 3

6 AT A GLANCE We have made an encouraging start with Five Grain Premium Lager, which is pictured here in 330ml can. Bear Island East Coast Pale Ale was a popular feature of this year s Craft Beer Rising festival, anticipating the growing trend for fuller flavoured beers. We have carried out transformational investments at the Market House, Maidstone, the Boathouse, Yalding and the Spitfire, Kings Hill. All three opened in the final quarter of the year and the performance and customer reaction has been excellent. Our two new acquisitions, the Savoy Tap, just off the Strand and the Samuel Pepys, our first riverside pub in London, have strengthened our presence in the capital and provide an excellent shop window for our beers. 4 Shepherd Neame annual report and accounts 2018

7 Total number of pubs 321 PUBS Total investment in existing pub estate M Tenanted pubs 242 PUBS New pubs acquired 2 PUBS Managed pubs 68 PUBS Pubs sold 8 PUBS Commercial free of tie 11 PUBS Freehold proportion of estate 86 % Strategic Report Governance Financial Statements Other Information LFL managed drinks sales % LFL managed accommodation sales +2.9 % 1 All KPI information is on a 52 vs 52 week basis 2 Comprises capital expenditure of 10.2m and repairs and decorations of 2.8m 5

8 CHAIRMAN S STATEMENT Shepherd Neame is a strong business with an enviable track record of delivering consistent growth. MILES TEMPLEMAN Chairman I am delighted to report another successful period for the 53 weeks to June (2018 Financial Year). Shepherd Neame is a strong business with an enviable track record of delivering consistent growth and this year has been no exception. We have made further good progress against our strategic objectives, and some great individual investments in our pubs. During the year we have restructured our brewing and brands business to focus on developing our own brand portfolio following the expiry of the Asahi contract. We have incurred one-off transitional costs of 1.8m. A key strength of the company is the balance between the different financial and market characteristics of each division of the business which gives resilience in the face of more challenging market conditions. The business has continued to absorb significant cost inflation from business rates and the National Living Wage and although revenue and margins have been under pressure in our managed pubs, our high quality tenanted pubs have performed well and the brewing and brands division has delivered a very satisfactory performance. Our aim is to build an estate of well invested pubs and to create a portfolio of great beer brands. We operate wonderful pubs in unique locations and we invest to build their character and individuality, to develop their offer and enhance the overall customer experience. At our brewery we brew a wide portfolio of classic British ales and modern keg beers and lagers. We strive to develop our product quality, innovate with new tastes and flavours and invest to raise awareness of our brands. In all parts of the business a constant focus is to modernise our working practices and internal processes to drive productivity. We have delivered sustained dividend and profit performance over a long period. Our strong cash flow and the recycling of non-core assets enable us to strengthen the balance sheet through selective pub acquisitions in our core trading areas of Kent, London and the South East. We look to deliver future growth by continuing our successful strategy. A key factor in our thinking is the anticipated economic growth within our Kent heartland over the next 15 years. There is major house building planned in all major conurbations, with substantial development in and around Ashford and Ebbsfleet. Further transport and infrastructure projects are programmed including schemes such as the Lower Thames Crossing and further upgrades to the HS1 rail link. The population of Kent is forecast to grow by more than 20% by We aim to build the business to take advantage of these trends by ensuring we own and operate the best pubs in the key locations and develop them to their full potential for food, drinks and accommodation. Financial Results These results are for the 53 weeks ended 30 June All commentary is for the statutory periods unless indicated. Total turnover for the 53 week period grew by +0.2% to 156.6m (2017: 156.2m). The 53rd week contributed broadly 3.0m of turnover. Turnover in our managed pubs was the key driver for growth, offset by an anticipated decline in brewing and brands as we sold less beer than in the prior year following the expiry of the Asahi contract in January Underlying operating profit grew by +5.3% to 16.1m (2017: 15.3m). The 53rd week contributed broadly 0.5m of underlying operating profit. Statutory operating profit fell by -7.5% as a result of one-off charges in respect of restructuring costs and an impairment charge. Underlying profit before tax 1 grew by +5.4% to 11.8m (2017: 11.2m). Statutory profit before tax grew by +2.9% to 12.1m (2017: 11.8m). Cash flow was strong and underlying EBITDA 2 grew by +5.5% to 24.6m (2017: 23.4m). Margins in the business as a whole increased, as the mix of business changed, with underlying operating profit margin at 10.3% (2017: 9.8%) and EBITDA margin at 15.7% (2017: 15.0%). Underlying basic earnings per share are up +6.6% to 63.0p (2017: 59.1p) and basic earnings per share are down slightly at 68.1p (2017: 69.1p) due to a higher tax charge in Profit before any profit or loss on the disposal of properties, investment property fair value movements and exceptional items. 2 Underlying profit before tax pre net finance costs, depreciation, amortisation, profit or loss on sale of fixed assets excluding property and free trade loan discounts. 6 Shepherd Neame annual report and accounts 2018

9 Dividend The Board is proposing a final dividend of 23.45p (2017: 22.73p) making the total dividend for the year 29.20p (2017: 28.35p), an increase of +3.0%. This represents underlying dividend cover of 2.2 times (2017: 2.1 times). In line with our policy we will continue to target underlying dividend cover at or above 2 times. The final dividend will be paid on 19 October 2018 to shareholders on the register at the close of business on 5 October Capital and investment Capital expenditure was 14.7m (2017: 38.0m). This is below the prior year when we acquired 14 new pubs, with two new pubs purchased in We continue to actively manage our property assets and have realised 6.0m (2017: 5.9m) from property disposals in the period. As a result of good cash management and lower capital expenditure, net debt has reduced to 74.8m at June 2018 from 78.1m in June 2017 and the leverage ratio of net debt to EBITDA has reduced to 3.0 times (2017: 3.3 times). We have no outstanding final salary pension liabilities. Political and economic environment The 2016 referendum decision to leave the EU has created uncertainty for business. It is still far from clear what future trading relationship we will have with the EU. However, it is clear that attracting and retaining the right talent will be a critical success factor for all businesses going forward. We are reviewing our current practices to ensure we are the employer of choice in our region. Thankfully, we are building on a good base as a long established and well respected business with a strong reputation as a good employer. Summary The Board is focussed on investing for the long term benefit of shareholders with the vision of being a Great British Brewer and running the best pubs in our region. Recent years have seen great strides in developing the business and the quality of our brand and pub portfolio has improved materially. The three operating divisions brewing and brands, managed pubs and tenanted pubs have different characteristics. The tenanted pubs division is the largest division by contribution, with many excellent pubs in the estate driving relatively low variability of earnings. The managed pub division, which includes some superb coastal sites, is more exposed to seasonal factors and has incurred a significant level of cost inflation, but makes an excellent contribution to overall results. The performance this year in the brewing and brands business has been very satisfactory given the transition underway and demonstrates that the division was able to retain its highly desirable cash-generating characteristics despite lower turnover. The combination of divisions results in a business as a whole which remains strongly cash generative and whose balance between activities helps to ensure sustainability for the long term. The coming year has more political and economic uncertainty than most of us can remember. But, whatever the short term impact, we believe that we are well positioned to take advantage of opportunities that arise in our local region and in the wider industry. Miles Templeman Chairman Strategic Report Governance Financial Statements Other Information 7

10 OUR STRATEGY We aim to drive footfall by designing and developing unique pubs and hotels with a wow factor. TO DRIVE FOOTFALL TO OUR PUBS The newly refurbished Spitfire, Kings Hill 8 Shepherd Neame annual report and accounts 2018

11 Strategic Report Governance Financial Statements Other Information Design innovation The Crown and Cushion, Minley, which was crowned the Shepherd Neame Pub of the Year in Stylish interiors Great pub design plays a hugely important part in creating a premium experience and we have excellent in-house design skills. Raising standards Following the launch of the new brand identity in the prior year, we have completed signage schemes in more than a quarter of the total pub estate. 9

12 CHIEF EXECUTIVE S REVIEW Good progress in all areas of the business despite more challenging market conditions. JONATHAN NEAME Chief Executive I am pleased to announce a strong set of results for the period, with further good progress in all areas of the business, despite more challenging market conditions. After a period of record investment in the prior year, the 2018 financial year was going to be a period of consolidation of the recent acquisitions. Further, we had to deal with the challenge of repositioning the brewing and brands business to focus on our own beers after the expiry of the Asahi contract. A key trend in the hospitality sector in the 2018 financial year has been the slowdown in food sales offset by a stronger performance for drinks-led businesses. Shepherd Neame runs pubs, not restaurants. Eating out in pubs provides a different experience from that in a casual dining restaurant. The resilience of our pubs comes from the differentiation in our offer, the quality of our service, the provenance of our menus and the character, heritage and authenticity of our outlets, thereby giving a unique pub experience. A further significant factor in the 2018 financial year has been the less favourable weather trends compared to the prior year, with a particularly cold spring in 2018, when trade was materially below normal trading levels. A number of our key coastal sites were affected by this. But as soon as the weather improved these same sites performed strongly. The fact that the company has continued to deliver a good profit outturn for the period in these conditions is testimony to the premium quality of our business and the balance of the revenue streams. We have achieved this performance by pursuing a consistent strategy over a long period based around four key objectives: to drive footfall to our pubs; to develop the offer to enhance the customer experience; to create demand and build awareness for our brands; and to attract, retain and develop the best people. Throughout the last few years we have invested in our head office team to ensure we have the right skills to exploit the opportunities in the market. We have a talented team who are passionate about the business and committed to driving future success. During this period we have strengthened the senior team with the appointment of Joanna Richardson as Head of Marketing, Brands and Communications and Michael Unsworth as Head of Production. Tenanted and Managed Pub Operations Overview At the year end we operated 321 pubs and hotels (2017: 327) of which 276, 86% of our outlets, are freehold (2017: 285). Of our total pubs, 68 (2017: 66) were managed at the year end and 242 (2017: 253) were tenanted or leased and 11 (2017: 8) were operated under commercial free of tie leases. Approximately two thirds of our total pubs are in Kent, 35 in Greater London and the rest in Essex, Sussex, Surrey, Berkshire, Hampshire and Middlesex. We are looking to acquire pubs throughout this core territory with gradual geographical expansion as appropriate. We seek sites with unique character in landmark or high footfall locations and then invest in them to create a premium and differentiated customer experience. We aim to own and operate the standout pubs in each community we serve. In general, we look to grow through selective single site acquisitions but small pub groups are attractive to us if the right opportunity arises. During the last five years, we have acquired 22 pubs and disposed of 51. These acquisitions and disposals have transformed the profile of our pub estate, with average EBITDAR per managed pub increasing by +21.0% in five years and average EBITDAR per tenanted pub growing by +34.5%. In the 2018 financial year, we have opened a new outlet in Chatham Maritime, Pier Five Bar and Kitchen. This is a new waterside destination in a modern bar environment in this fast-developing area of the Medway Towns. The bar offers a premium range of craft beers, craft spirits and cocktails alongside great food and artisan coffee. This has a different trading style from our traditional offer and we are encouraged by its performance since opening. We also acquired two new pubs in London, the Samuel Pepys, our first riverside pub on the Thames opposite the Tate Modern, and the Savoy Tap, in Savoy Place, off the Strand. Both have undergone subsequent refurbishments and the Savoy Tap re-opened in mid- August These pubs help to strengthen our profile in central London and provide an excellent shop window for our beers. Since the year end we have acquired the Wheatsheaf in Farnham. This is a premium pub with a strong reputation for food and drinks, centrally located in this affluent town. We are also planning to build a new pub hotel in Castle Hill in the centre of the vast Ebbsfleet Garden City development 10 Shepherd Neame annual report and accounts 2018

13 zone, where approximately 15,000 houses are planned to be built in the next ten years. The site is halfway between the Ebbsfleet International Station and Bluewater Shopping Centre, in a landmark location. We have other potential new build sites in the pipeline in and around the major new developments in our heartland. All of the above will be operated as managed pubs. As we strengthen the quality and profile of our pub estate, we continue to dispose of those outlets that no longer fit our strategy. We have realised 6.0m of proceeds (2017: 5.9m) from the sale of eight pubs (2017: 15 pubs) and one (2017: two) unlicensed property. Driving Footfall to our Pubs We aim to drive footfall to our pubs by designing and developing unique pubs and hotels with a wow factor. We believe that continuous investment in our internal facilities and improvement to the kerb appeal of our pubs will make our outlets stand out from the local competition and so attract new customers and retain existing ones. Great pub design plays a hugely important part in creating a premium and differentiated experience. We have excellent skills in-house and use external consultants as appropriate. This year we have invested 10.2m (2017: 8.3m) in capital expenditure to improve the look and feel of our tenanted and managed pubs and 2.8m (2017: 2.4m) in repairs and decorations. In the managed estate, we carried out three transformational investments and are delighted by the results. We invested 0.9m at the Market House (formerly Earls), Maidstone, a further 1.0m at the Spitfire, Kings Hill, West Malling, and a further 1.2m at the Boathouse (formerly the Anchor), Yalding. All three opened in the final quarter of the year and made limited contribution to the overall results, but the performance and customer reaction have been excellent. In each, we have created superb outside space, in particular at the Boathouse, and offer a premium drinks range and a distinctive food offer. In the tenanted estate, we carried out major developments at the Dover Castle, Teynham, the Early Bird, Maidstone, the Britannia, Dungeness and the Rose and Crown, Elham. We co-invested with our licensees at various sites such as the Bull, Newick. Following the launch of the new brand identity in the prior year, we have completed new signage schemes in more than a quarter of the total pub estate. Developing our offer to enhance the customer experience We aim to enhance the customer experience in our pubs by delivering great fresh food, providing accommodation of character and offering an interesting range of products. We operate a well invested, balanced portfolio of pubs. In our managed business drinks sales represents 56% of the sales mix (2017: 56%), with food sales 34% (2017: 33%) and accommodation 9% (2017: 10%). Within our tenanted estate our pubs are also well positioned across drinks, food and accommodation income streams. There are 294 letting rooms in the managed estate and 220 in the tenanted estate. We have upgraded several of our bars and introduced new brands of our own and a wider range of premium and keg beers. In several outlets, we have introduced craft beers and ciders and premium international beers to sit alongside our core range. Our own beers have performed well in this context and this wider choice has been well received by our customers. Now that our commitments to licensed partners are reduced, we can be more flexible with new products and innovation going forward. Our wine offer is responsive to market trends and we work with independent family producers around the world. We have continued to derive benefit from the interest in premium and local spirits and have increased our range significantly in recent times. Like-for-like drinks sales in the managed estate grew by +2.3%, following a strong period in the prior year (2017: +8.0%). Trends in the eating out market are becoming more challenging and competition is increasing. Our managed like-for-like food sales declined marginally during the year by -1.3% against strong comparables in the prior year (2017: +7.7%). The consumer wants well-presented and interesting food with great service in attractive surroundings. To ensure that our offer remains competitive and differentiated, we have launched a number of initiatives in the 2018 financial year in our managed pubs: improved presentation of top dishes such as burgers, steaks and Sunday lunch; Strategic Report Governance Financial Statements Other Information 11

14 OUR STRATEGY We aim to enhance the customer experience in our pubs by delivering great fresh food, providing accommodation of character and offering an interesting range of products. Colourful, inventive fresh food for a great shared experience 12 Shepherd Neame annual report and accounts 2018

15 TO DEVELOP OUR OFFER TO ENHANCE THE CUSTOMER EXPERIENCE Strategic Report Governance Financial Statements Other Information Accommodation of character We refurbished 16 bedrooms including those at the Conningbrook, Ashford, as part of our ongoing programme to maintain high standards in our managed pubs. Award-winning pubs Many of our pubs continue to excel with the Sportsman, Seasalter being named Britain s best gastropub for the third time and the Compasses, Crundale making the top 50 gastropubs, as well as earning the title of Food Pub of the Year at the Great British Pub Awards. Premium range Our offer includes a premium range of craft beers, craft spirits and cocktails alongside great food and artisan coffee. 13

16 CHIEF EXECUTIVE S REVIEW CONTINUED expanded range of healthy, lighter, vegan and low calorie options; introduced more sharing dishes; and using technology to improve speed of service and pre-booking Our food development team and head chefs work closely with local suppliers such as family butcher, Joseph and Henry, part of J C Rook & Sons Limited, and R J Kingsland & Son Limited sourcing fresh and local produce for our menus. We work with all our suppliers to develop menus and to roll out training and demonstrations to the chef teams. We share best practice and best prices with our tenants. Our managed like-for-like accommodation sales grew by +2.9% against significant growth in the prior year (2017: +10.1%). During the period we refurbished 16 bedrooms (2017: 37) as part of our ongoing programme to maintain high standards in our managed pubs. Despite a more challenging consumer environment, we maintained occupancy at the high level of the prior year of 79% (2017: 79%), whilst RevPAR grew marginally to 67 (2017: 66). Managed Pub Performance Our continuous investment within a consistent strategic framework has again enabled us to perform ahead of the market. The Coffer Peach Business Tracker 1 recorded growth in the market of +0.7% for the 12 months to June Total divisional turnover in the managed estate grew by +7.7% to 65.3m (2017: 60.7m). Divisional underlying operating profit was 8.7m (2017: 9.0m). Underlying operating margins in this division were down by -1.5%, -0.5% of which related to the timing of major developments in the year, -0.9% incremental costs of the National Living Wage, apprenticeship levy and higher business rates, -0.3% food inflation and +0.2% mitigating savings. Same outlet like-for-like sales grew by +1.3% (2017: +8.1%). Average EBITDAR per managed pub was down -1.8% (2017: +1.8%). Tenanted Pub Performance Total divisional turnover in tenanted pubs grew by +2.7% to 35.4m (2017: 34.4m) and divisional underlying operating profit grew by +1.9% to 13.2m (2017: 13.0m). Same outlet like-for-like EBITDAR in tenanted pubs grew by +2.1% (2017: +1.6%) and average EBITDAR per pub grew by +5.8% (2017: +5.6%). We have continued to increase investment in property repairs and capital expenditure meaning underlying operating margin was down -0.3%. Brewing and Brands Overview The 2018 financial year has seen a significant change in our brewing and brands business as we focus our energies into developing our own portfolio. We intend to allocate more of our limited capacity to build own brands and focus on those areas of the market where we have a competitive advantage or a strong position. Simultaneously we have taken action to streamline our sales management structure, to reduce operating costs in the brewery in line with the reduced volume expectations, and to modernise our plant. Specifically we have invested 0.9m in installing a new high speed labeller and upgraded our filler to enhance productivity on the bottling line. These changes have resulted in considerable upheaval in the business and we have incurred one-off transitional costs of 1.8m. We completed the final six months period of the Asahi licence in January We enjoyed overall volume growth in the first half and then, as anticipated, volume reduced in the second half. Asahi represented 28,000 barrels, or 14% of the 2018 brewed volume (2017: 51,000 barrels or 23% of total brewed volume). Our volume will fall again in 2019 as we exit contracts to brew certain third party private label beer in line with our strategy. However we have renewed our partnership with leading US craft brewer Boston Beer Company to give us broader access to their wide and highly successful craft beer portfolio. We have received good reactions from our customers for the changes made to our portfolio and have expanded distribution for our own brands. We have enjoyed considerable success with Spitfire Lager, the Lager of Britain, and made an encouraging start with Five Grain Premium Lager and have introduced it in 330ml can. The Whitstable Bay Collection continues to deliver growth in volume and distribution. Spitfire and Bishops Finger continue to hold their place in the top 10 premium bottled ales. Orchard View Cider has had an excellent year, particularly with the fine weather over the summer of 2018, and Bear Island East Coast Pale Ale, with its hop-forward character, has got off to a superb start, in exploiting the trends for fuller flavour beers. As a result of the change in the Brewing and Brands strategy we will focus on our core own brands excluding contract, licence and third party private label. In this year of transition these volumes declined marginally by -0.9%. The UK beer market in the same period grew by +0.4%. Creating demand and building awareness for our brands We aim to create demand and build awareness for our brands by developing a range of distinctive beers, by instilling a passion for quality, and by having great engagement with our customers. In the 2018 financial year we took some important steps to align and consolidate our customer databases to improve communication and enhance customer engagement. We also raised awareness for Whitstable Bay with advertising on the London Underground as part of a Visit Kent campaign and ran a successful promotion to win a beach hut. It was pleasing to note that Whitstable Bay won an award for Best Merchandise at the Beer and Cider Awards We intend to increase investment in our brands and pubs marketing and develop our consumer engagement. We also intend to invest in our Visitor Centre to make it a great destination for beer lovers and an outstanding experience when they visit Britain s Oldest Brewer. Brewing and Brands Performance Divisional turnover declined by -8.9% to 54.4m (2017: 59.8m) in line with total own beer sales volume down -10.6% to 196,000 barrels (2017: 219,000 barrels). However, divisional underlying operating profit grew by a healthy +46.9% to 2.3m (2017: 1.6m) and divisional underlying EBITDA grew to 4.4m (2017: 3.9m) ahead of the previous 1 Tracker for sales trends for pub, bar and restaurant groups. 14 Shepherd Neame annual report and accounts 2018

17 guidance of 3.5m, at a margin of 8.2% as a result of production efficiency on a simpler portfolio. Attracting, retaining and developing the best people We aim to attract, retain and develop the best people by understanding the potential in everyone, inspiring them to achieve their goals, and by building loyalty and engagement of our licensees and employees through the professionalism of the support we provide. We have continued to develop the training and development of our pub staff. We now employ 1,403 managed pub staff (2017: 1,372). Given the historically high level of staff turnover in the hospitality sector, it is important to retain great staff and enhance their skills. We have personal development plans to support the training and qualifications of employees and we run frequent chef and supplier forums and menu training sessions in our pubs. Most sites have customer service and coffee champions to help develop the front of house team and our head chef mentor programme is working well. We are investing more on air conditioned kitchens to ensure a quality working environment. We have reviewed the pay, incentives and conditions of our managed pub staff and have introduced a new bonus and incentive structure, aligned to deliver a great service to our customers, for managers and chefs in the 2019 financial year. We continue to provide excellent support for our tenanted licensees through menu and drinks list development as well as comprehensive training. We work closely with our licensees to identify the key areas where we can support their business to help them succeed. We are developing an enhanced regulatory compliance package for our licensees in the coming year. Our approach to our licensees is one of flexibility, within the framework of a traditional tenancy agreement. We work with them to create a common business plan and then provide the investment and support to help both parties achieve their goals. We adapt the tenure and rent structure to reflect the plan and have modernised our tenancy agreement to reflect this approach. During the last year, we have launched a programme for all employees called the Sheps Way, that sets out how we recruit, train and develop our people and articulates the Company s behaviours and values. It was wonderful to see the Crown and Cushion, Minley crowned the Shepherd Neame Pub of the Year in Throughout the business, we take great pleasure in recognising and rewarding the outstanding achievements, at the annual Shepherd Neame Staff Oscars and Annual Licensees Awards. Investment Property The Company owns 7.9m of investment property, as revalued June 2018 (2017: 6.8m). We actively manage our non-core property portfolio and have achieved considerable success in the last year in selling several smaller sites for housing development. Our principal asset remains the former farmland at Queen Court, Ospringe. During the year, the company made a planning application for 50 houses on a seven acre site. The planning application was refused but we are in the process of appealing this decision. Current Trading The sustained warm weather in July and August has enabled the company to start the new year strongly. Our coastal sites have enjoyed a particularly good summer. The FIFA World Cup, as expected, was good for drinks sales. In the 11 weeks to 15 September 2018, same outlet like-for-like managed sales were up +5.1% (2017: +1.4%). In the 9 weeks to 1 September 2018 like-for-like EBITDAR in the tenanted estate was up +6.2% (2017: +0.6%). In the same period, total own beer volume fell by -27.4% (2017: +3.6%) in line with expectations, but Shepherd Neame own brand beer and cider volumes was up +6.4% (2017: -6.5%). Summary The principal objectives this year were to consolidate the prior year acquisitions, deliver three large and complex managed investments and undertake the change in direction in the brewing and brands business. I am delighted with the way the team has responded to these challenges and the outcome in all three operating divisions has been very satisfactory. The profit performance of the brewing and brands division is particularly pleasing, although we are still in a transition phase. Whilst we planned for these objectives, and anticipated the cost pressures arising in the sector, we did not expect the tougher trading conditions that prevailed for most of the financial year. As such, it is most encouraging that we were able to deliver a good overall performance. We have a clear strategy to grow the business and are excited about how we are positioning ourselves to take advantage of the long term economic prospects in our heartland. We are confident that we have great sites in the right locations. As we continually improve our offer, we need to invest in brand and pub marketing and in consumer engagement, to make our pubs the centre of their community life, our beers the go-to brands and the company the employer of choice. Despite the considerable political and economic uncertainty that will exist throughout 2019, our prospects for sustaining the steady long-term growth we have delivered over many years remain good. Jonathan Neame Chief Executive Strategic Report Governance Financial Statements Other Information 15

18 OUR STRATEGY We aim to attract, retain and develop the best people by understanding the potential in everyone, inspiring them to achieve their goals and building the loyalty and engagement of our licensees, through the professionalism of the support we provide. TO ATTRACT, RETAIN AND DEVELOP THE BEST PEOPLE 16 Shepherd Neame annual report and accounts 2018

19 The team at the Market House, Maidstone Inspiring licensees We work closely with licensees with character and creative flair to support and build their business. Building loyalty At our annual pub awards we celebrate longer term success including three generations of the Pemble family who have operated the Pepperbox, Ulcombe for over 60 years. Attracting talent We have strengthened our senior team with the appointment of Joanna Richardson as Head of Marketing, Brands and Communications and Michael Unsworth as Head of Production. Strategic Report Governance Financial Statements Other Information 17

20 OTHER FINANCIAL COMMENTARY Finance costs Net finance costs increased to 4.3m (2017: 4.1m) following the impact of the acquisition of Village Green Restaurants Limited in November 2016 which increased finance charges in the first half of the 2018 financial year. Underlying interest cover was 3.7 times (2017: 3.7 times). Items excluded from underlying results Total items excluded from underlying results were a net credit of 0.4m (2017: net credit of 0.6m). This year s items comprised four elements: One-off operating charges of 1.8m were incurred in the year in relation to restructuring costs following a review of strategy for the brewing and brands division associated with the expiry of the Asahi contract. In the previous financial year exceptional costs of 0.3m were incurred in relation to a food safety and hygiene regulation fine and associated legal costs at the Royal Wells Hotel, Tunbridge Wells; The annual impairment review resulted in an impairment charge of 0.6m relating to three properties (2017: 0.2m charge in relation to two properties); Property profits of 1.9m (2017: 0.6m) on the sale of eight pubs and one unlicensed property (2017: 15 pubs and two unlicensed properties) were recognised as the business continues to dispose of predominantly small community wet led pubs and unlicensed assets that no longer fit with the Group s long-term strategy; and The annual revaluation to fair value of investment properties on the balance sheet resulted in an increase in value of 0.8m (2017: 0.5m). The total value of this asset category sits at 7.9m (2017: 6.8m) Profit Tax Rate Profit Tax Rate Summary rates of taxation % % Profit before tax and tax thereon 12,119 2, ,780 1, Operating charges excluded from underlying results 1, Impairment Profit on disposal of property (1,908) 102 (588) 605 Investment property fair value movements (823) (156) (496) (98) Effect of reduction in CT rate on deferred tax provision 315 Underlying profit before tax and underlying tax thereon 11,769 2, ,165 2, Taxation The total tax charge was 2.1m (2017: 1.6m), an effective rate of 17.4% (2017: 13.3%) following reduction in deferred tax balances. The average statutory rate of corporation tax in the UK for the period was 19.0% (2017: 19.75%). The underlying tax rate was 21.3% (2017: 21.8%). The net tax charge on items excluded from underlying results was a credit of 0.4m (2017: credit of 0.9m). The Group expects the underlying tax rate to continue to be around 2% higher than the average statutory rate in place. Earnings per share and dividends Underlying basic earnings per ordinary share increased by 6.6% to 63.0p (2017: 59.1p) following the increase in underlying operating profits. Basic earnings per ordinary share decreased to 68.1p (2017: 69.1p) due to a higher tax rate than the previous financial year. The tax charge in the previous year had benefited from the enactment of the Finance Act 2017 resulting in deferred tax balances being revalued at 17% which will be effective from 1 April Dividend per share paid and proposed in respect of the year increased by 3.0% to 29.20p per ordinary share (2017: 28.35p per ordinary share) to give total dividends of 4.3m (2017: 4.2m). Total dividend cover has fallen to 2.3 times (2017: 2.4 times) due to the higher overall tax rate but underlying dividend cover increased to 2.2 times (2017: 2.1 times). Cash Flow The increase in underlying operating profits meant underlying EBITDA increased by +5.5% to 24.6m (2017: 23.4m). Working capital improved by 2.3m (2017: 1.4m) following the greater mix of managed pub sales. Tax cash payments increased to 2.8m following higher profits. As a result of these three factors the net cash inflow from operating activities increased by 0.5m to 22.6m (2017: 22.1m). The total cash cost of interest and dividends increased by 1.1m to 9.2m (2017: 8.1m). Due to the 2018 financial year being 53 weeks in length five quarterly interest payments were incurred. The 2019 financial year will revert to four quarterly payments. Dividend payments reflect the increase in payment of the final 2017 and interim 2018 dividends. In order to service the Company s future obligations under employee incentive plans 2,200 shares were purchased (2017: 124,514) at an average market price 18 Shepherd Neame annual report and accounts 2018

21 Cash flow and net debt Summary cash flow statement Underlying EBITDA 24,639 23,352 Working capital and other operating cash flows 2,266 1,427 Tax (2,831) (2,668) Operating charges excluded from underlying results (1,475) (31) Cash flow from operations 22,599 22,080 Dividends paid (4,197) (4,102) Interest paid (4,970) (3,994) Purchase of own shares and share option proceeds (1,326) (610) Issue costs of new loan (292) Disposal of fixed assets 6,008 5,876 Internally generated free cash flow 18,114 18,958 Core capital expenditure (14,015) (13,212) Net loans to customers Cash flow pre acquisitions and debt repayment 4,174 5,828 Acquisition of pubs (733) (12,456) Acquisition of subsidiaries (12,378) Cash acquired on acquisition 827 Repayment of borrowings (2,000) New bank loans raised 19,000 Net cash inflow for the period 1, Movement in loan issue costs (155) 172 Closing net debt (74,797) (78,083) of (2017: 13.22). Within the year all the consideration for shares purchased was settled, combined with a further 1.3m of consideration from shares purchased in the 2017 financial year. Total disposal proceeds of 6.0m (2017: 5.9m) were realised from the sale of eight pubs and one unlicensed property (2017: 15 pubs and two unlicensed properties). Taking these items together internally generated free cash flow was lower at 18.1m (2017: 19.0m) largely due to the additional quarterly interest payment. A portion of this cash generation has been used to reduce net debt and the remainder has been invested aligned to our long-term strategy as follows: Cash spend on core capital expenditure was 14.0m, up from 13.2m in 2017 as we continue to invest to strengthen the pub and brewery asset base. This was driven by the developments at the Market House, Maidstone, the Spitfire, Kings Hill, West Malling and at the Boathouse, Yalding, an increase in tenanted developments and brewery infrastructure projects. A further 0.7m was invested in the acquisition of two new leasehold sites in central London, the Samuel Pepys and Savoy Tap. In m was invested in the acquisition of eight freehold pubs from Ei Group plc and the purchases of Ultimate Entertainment Services Ltd and Village Green Restaurants Ltd. Financing and loan facilities The Company is funded by a 45m 5-year revolving credit facility maturing in 2020 and a 60m 20-year term loan maturing in 2026 together with a 2m overdraft facility which is renewable in December Amortisation of this term loan starts in 2021 with annual repayments of 1.6m with the balance repayable in December The floating element of interest on the 20-year term loan was fixed by swap contracts to give an effective rate of interest of 5.78%. These swap contracts are revalued annually to fair value taking into account current prevailing long-term interest rates. The value of these derivatives at 30 June 2018 was a liability of 17.0m (2017: 21.9m). The policy for managing treasury and financial risk is as set out in note 22. Balance sheet There was a 2.1m increase in fixed assets (2017: increase of 26.4m) and a fall in net debt of 3.3m to 74.8m (2017: 78.1m). Balance sheet gearing at the year end was 37% (2017: 41%) and the leverage ratio of net debt to EBITDA at the year end was 3.0 times (2017: 3.3 times). Shareholders funds at 30 June 2018 were 201.1m (2017: 191.1m) meaning net assets per share showed an increase of +5.2% to (2017: 12.86) Financial Year The 2019 financial year will be a 52 week period to 29 June 2019 and hence will have one trading week less. Strategic Report Governance Financial Statements Other Information 19

22 OUR STRATEGY We aim to create demand and build awareness of our brands by developing a range of distinctive beers, instilling a passion for quality and having great engagement with our customers. The Savoy Tap, London Customer engagement We are strengthening our customer engagement with our new publication OAST. Developing our range This year has seen a significant change in our brewing business as we focus on developing our own brand range. Building awareness We raised awareness for Whitstable Bay with an advertising campaign on the London Underground. The brand won an award for Best Merchandise at the Beer and Cider Awards Shepherd Neame annual report and accounts 2018

23 Strategic Report Governance Financial Statements Other Information TO CREATE DEMAND AND BUILD AWARENESS FOR OUR BRANDS 21

24 PRINCIPAL RISKS AND UNCERTAINTIES Risk management overview The Board and management team continually assess the risks that the Company is exposed to through operating the brewing and brands and pub divisions. Classification of risks takes into account the likelihood of their occurrence and the scale of potential impact (both financial and reputational) on the business. Once the key risks have been identified, each business unit and functional area is responsible for Principal Risks Potential Impact Mitigation and Monitoring ECONOMIC AND POLITICAL Strength of the Economy and the United Kingdom s exit from the European Union evaluating current controls in place to manage their risks. The individual risk registers are reviewed and the risk mitigation plans are monitored. Risk registers are aggregated and considered on a top-down basis in the context of delivering our strategy and are adapted appropriately to the changing environment. Some external risks are out of the direct control of the Board. These points are discussed at Board meetings to ensure A fall in consumer confidence and a weakening economy could lead to customers drinking and eating at our pubs and hotels less frequently which in turn could lead to lower profitability. that the business can respond effectively to changes in the external environment. These risk management processes are designed to manage risks which may have a material impact on the business rather than to mitigate all risks entirely. These principal risks and uncertainties are not an exhaustive list of all risks and uncertainties the Company faces. The Board maintains an updated view of the context of Brexit negotiations and of economic trends in the UK economy and hospitality sector. We respond to these changes by reviewing investment levels in our brands and pubs and through active property management in order to continue to encourage a variety of customers to our products and pubs Change since last year/risk trend The United Kingdom s exit from the European Union could lead to a reduction in the UK s hospitality workforce and a skills shortage A significant number of EU nationals are key employees within our brewery and within our pubs and are key to us delivering great service to our customers. Any reduction in this workforce may make recruitment more difficult or expensive and may lead to labour shortages and higher costs. Post the UK s exit from Any delay in customs processing at the key port the European Union of Dover can lead to significant road delays and any changes to customs blockages across our heartland territory of Kent. legislation could lead This can delay customer orders and supplier to greater road deliveries increasing costs to the business. congestion around Dover and the Kent road infrastructure REGULATORY Regulation and Taxation of the Sale of Alcohol The drinks industry is tightly regulated and heavily taxed through excise duty. There is a risk that future increases or changes in taxation could affect customer demand for our products and our profitability. We have looked to improve our development opportunities, working conditions and employee engagement to retain our existing workforce and to ensure Shepherd Neame are the employer of choice in our heartland territory. We monitor inventory levels carefully to ensure that we have adequate buffer supplies of key supply materials to protect against periods of supply delay. We actively work with our customers and pubs to look to ensure supply through periods of road delay. Legislative developments are monitored and we aim to grow income streams from other sources such as non-alcoholic beverages, food and accommodation. We are committed to acting responsibly and promote safe drinking. The company has membership of the BBPA and Directors are members of key industry bodies where regulatory matters are discussed and influenced. Regulation of Tied pub agreements Health and Safety The company operates a number of arrangements under the tied pub model. This model continues to attract a level of political scrutiny in the light of the introduction of the new statutory pub code which came into place in The company is currently not impacted by the statutory code as it owns and operates fewer than 500 tied pubs. If the code were to change and apply to operators of fewer than 500 tied pubs this could lead to higher costs and lower profits. Operating a large number of pubs and a brewery manufacturing site increases the complexity of operations and processes. Any non-compliance with health and safety legislation could have serious consequences for our customers, employees and tenants. Regulatory developments are monitored and the Company has membership of the BBPA and Directors are members of key industry bodies where regulatory matters are discussed and influenced. The Company works hard to ensure good relations with tenants, provides flexible agreements for licensees and continues to invest in property repairs. The Company has a new Head of Health and Safety and has further invested in an assistant resource in the 2019 financial year. The Head of Health and Safety reports directly to the Executive Board on all health and safety matters across the organisation and carries out all key risk assessments. Health and safety policies are approved and adhered to across all areas of the company and we provide regular training to employees. A panel of employees act as health and safety representatives for their respective areas of the business at the brewery site to ensure risks are identified and procedures are followed. 22 Shepherd Neame annual report and accounts 2018